Jim Chanos, China, and Canada’s Big Problem

This is going to be a one long email.  I wanted to share with you three articles from VALUEx Vail in which I go global – I discuss Germany and its pension problem, touch on the “pleasures” of investing in Russia, describe Jim Chanos’ presentation on China, and finally conclude with a discussion of the Canadian real estate bubble.

Jim Chanos, China, and Canada's Big Problem

I penned my first article in 2004, and every article I have written since, no matter where it was published, has been posted on  This website has been recently redesigned, and hopefully it will now be easier to find things there.

Finally, if you want to learn how to apply to attend to VALUEx Vail 2014, click here.

I am back from Santa Fe.  It was a fun trip.  My father, who turned 80 a few months ago, my son Jonah, and I drove from Denver to Pagosa Springs, spent a day there, and then drove to Santa Fe (stopping on the way in Los Alamos).  Santa Fe is an artsy little town.  Its buildings come in different shapes, colors, and sizes as long as they are adobe, one-story and beige-colored.  It was my second time in Santa Fe.  The first time was in the late ’90s, before smart phones, Tripadvisor Inc (NASDAQ:TRIP), and Yelp Inc (NYSE:YELP), and it was a spur of the moment kind of getaway trip.  I knew very little about the town then, saw very little of it, and didn’t particularly care for it.

My father, who has had his paintings in Santa Fe galleries for years, knows the town well, and he was our tour guide this time.  One morning we got up early and walked galleries along Canyon Street.  I’m told there are over one hundred fifty galleries on that street, and we must have stopped by most of them.  This was the first time I had done something like that, and I loved it.  It is not unlike going to different exhibitions in a very large museum.  I know little about art, so father was critiquing the work and teaching us about it.

Later in the evening we went to see La Traviata, which was an amazing experience.  The Santa Fe Opera House is located outside of the city, near the mountains, in a large open space.  A perfect place for a tailgate party.  Yes, opera tailgate parties!  I had seen tailgating at football games, but never at the opera.  People brought food and wine, and their car stereos were playing opera.  I loved it.  The Santa Fe Opera House is a beautiful building that has a roof but almost no walls on the sides or behind the stage.  I can see why people come from all over North America in the summer just to spend an evening or two at the Santa Fe Opera.

I was very impressed by son Jonah.  I asked him what he thought of spending half a day visiting galleries and then wrapping up the day at the opera.  He said “It wasn’t as bad as I thought it would be.”  To me this is big praise coming from a twelve-year-old!

Here are some pictures from the trip. These are pictures that I took with my Canon SLR, and here are the ones that were taken with my iPhone. (The sad part is that the pictures taken with the iPhone ended up being better than the ones taken with the bulky, fancy camera.)

While we walking galleries, I noticed that only two or three had Windows PCs while the rest had Apple computers.  The art community disproportionately favors Apple.  Speaking of Apple, it last-quarter numbers were not great – iPhones sales were good, but iPad sales were not.  The Apple Inc. (NASDAQ:AAPL) conference call was a waste of time – management said nothing new except to toss us this line: “The most recently published study by Kantar measured a 93% loyalty rate among iPhone owners, significantly higher than our competitors.”  This is a truly incredible figure.  If you use iPhone or iPad, you are very unlikely to buy a competitor’s products, even if they underprice them significantly.  It’s not apparent at first, but this loyalty creates an insane recurrence of revenue.

My mother-in-law had an Android tablet, and it quickly turned into an expensive paperweight on her kitchen counter.  Six months ago she got an iPad mini, and she is inseparable from it.  She won’t be buying another non-Apple phone or tablet.  There is a lot of bearishness on Apple in the media and blogosphere, but if these headlines start scaring you out of the stock, just visit a few Apple stores and your fears will all go away – the one we dropped in on recently in Denver was swarming with Apple fanatics, while the Microsoft store next door and the Samsung store at Best Buy were almost empty.  These folks will be buying whatever comes out of Cupertino for a long, long time.

Final thought on Apple.  In early June Apple introduced the Mac Pro.  Though this product is not very important for Apple financially – PCs and laptops are only about 15% of Apple’s sales – it clearly shows that innovation at Apple post-Steve Jobs is still very much alive.  With the exception of the operating system, all the components inside the Mac Pro are the same commodities you’ll find in your sucky, garden-variety Windows PC.  Despite that, Apple has managed to create a brilliant product in a category of products that has seen little innovation.  In addition to a cool look, it features a unique cooling design that also allows easy access to the guts of the system.

P.S.  The watercolor “After the Rain” is by my father, Naum Katsenelson

P.P.S.  In today’s musical note I want to share with you a wonderful piece from La Traviata, performed by Luciano Pavarotti and Joan Sutherland (here and here).  Pavarotti needs no introduction, but Joan Sutherland, who passed away in 2010, is maybe less known to the younger generation. (I had her recordings but knew little about her until a few years ago.)  Standing six feet two inches tall, the dynamic Australian soprano had, as Pavarotti himself put it, the “voice of the century.”  Music lovers should be thankful to her for discovering the other “voice of the century” – Luciano Pavarotti.  Without Sutherland’s help, Pavarotti might never gotten the lucky break that even people with incredible talent need from time to time.

Valuex Vail: Re-evaluating the Investment Process

The Process

Investing is a peculiar industry because randomness is so deeply embedded in everything we do. I am always fascinated by the investment processes of other successful firms. The outcome of every decision we make results from two inputs: our skill and our luck (randomness, whether good or bad). When you analyze anyone’s investment decisions solely based upon outcomes, you may unknowingly be attributing successes or failures to skill when randomness was actually responsible for the results.

Because randomness, unlike skill, is not permanently attached to an individual but travels where it will, results driven by randomness are not consistently repeatable. Therefore, in the investing industry (unlike, let’s say, the widget making industry, where one’s results could be objectively ascertained by the number of widgets produced per hour and their quality), we should focus on how an investor arrived at a particular decision. In short, we should focus on the investment process. In the long run, randomness will cancel out and the process will shine through in the results. At an investment firm, cultivating the process is challenging because you want the process to live in the firm and not just in its individuals; you want the process to be transferable from one generation of portfolio managers and analysts to the next. To achieve this, the firm’s culture and the inherent quality of its investment process are paramount.

This is why I was extremely interested in Win Murray’s dessert talk at Valuex Vail. Win is director of research at Chicago-based Harris Associates, an investment firm that manages $90 billion and runs the Oakmark funds.

Harris is focusing on the sustainability of the investment process so that it will last far beyond the